Managing cash flow for success

February 2021

There are several reasons why a business might fail but one of the most common is poor cash flow. However, with close monitoring and early intervention, it is possible to stay in control of your cash flow. In this article, I discuss how you can focus on managing your cash flow using better financial control and financial reporting. I also give you my ten reasons for preparing financial projections.

Lack of cash and cash management

The biggest single reason for failure is not lack of profit but lack of cash. It is possible to sustain losses for a while but ultimately it will catch up with you when your bank or other creditors act and withdraw credit. Without close management of debtors, creditors, and stock, you will tie up cash, forcing you to borrow more.

It is critical that managing your cash flow becomes a daily activity. If you know exactly when you can expect cash to come in, and from where, you can manage more easily the cash you have to pay out. You can then be confident with your creditors about when you will pay them, which in turn will build goodwill.

Understanding your cash flow and managing your customers’ and suppliers’ expectations is vital.

Financial control and information

Poor cash flow is often a symptom of a business with inadequate financial control and information, which is ultimately a route to failure.

In a small or medium-sized business, monitoring key performance indicators (KPIs) such as costs, budgets, and profitability of products and customers is important to understanding the current health of your business. Because they vary, you should monitor KPIs such as sales, gross profit and wages more frequently than fixed costs like rent, rates, and insurance. As well as giving you a snapshot of the current position of your business, you can use this information to make proactive decisions about the future rather than react to circumstances as they arise.

The power of projections – 10 reasons why

Financial planning is vital and projecting your business’s future position well in advance is the most important step you can take towards this. Here are my ten reasons why financial projections should form an indispensable part of your financial systems.

1. Business planning – financial modelling helps you plan both strategically and operationally by posing ‘what if’ and ‘what should we do’ questions of key financial information.

2. Decision making – projections enable you to make decisive, well-informed and accurate decisions.

3. Bank relationship management – a high-quality projection tool will demonstrate the financial and management strengths of your business. Increasingly, banks rely on projected cash flow rather than historic performance.

4. Raising capital – many projects require equity investment; potential investors expect to see a comprehensive analysis that clearly shows the potential return and timeline.

5. Monitoring performance – projections give you a benchmark that helps you to compare with your actual key performance indicators. Use regular performance reviews to target areas needing attention and ensure your business stays focused.

6. Viability analysis – projections allow you to assess risk and opportunity and consider these in a variety of scenarios.

7. Evaluate – financial modelling gives you the opportunity to step back, reassess your position, and identify potential gaps and future opportunities.

8. Communication – projections offer you a comprehensive and visual way of communicating your plans to key employees, helping to illustrate why you’ve made decisions, communicate the business targets and ensure acceptance.

9. Highlight best practice – financial projections help you to predict the costs of running your business and highlight areas where you can use better methods.

10. Allocating resources – Understanding the financial impact of your decisions can help you anticipate problems before they happen. Your financial model should identify the future financial impact of poor decisions and enable you to better allocate scarce financial resources.

What to look for in a projection tool

Whatever projection tool you choose to use, you need it to become the central focus of your financial controls. You need a tool that:

• produces an integrated report that projects cash flow, profitability, balance sheet and flow of funds
• projects movement on debtors and creditors control accounts, key measures if your liquidity is tight
• provides a break-even analysis
• projects sales, splitting them between target, committed, and gap (those to be sourced)
• documents fixed, variable, and discretionary overheads, while breaking down wages by person, type and function
• produces reports on a non-traditional and non-accounting basis so they can be understood by both finance and non-finance teams.

About the author

Anthony R. Carey
Dublin, Republic of Ireland

Tony Carey is managing partner and founder of Cooney Carey, Russell Bedford’s member firm in Dublin. Tony has over 35 years’ experience in corporate finance and business advisory services. His time as CFO of a large private concern gained him valuable practical commercial experience. His specialist areas include strategic planning, corporate recovery, financial investments, project funding and negotiation.

Author: Anthony R. Carey - Cooney Carey, Dublin, Republic of Ireland

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